After two years of massive VC investment, emerging economies like Latin America are now seeing those once-deep wells dry up. Softbank, which was behind more than a third of the money invested in LatAm between 2019 and 2022, has significantly rolled back its spending in the area. Knowing the influence a big-name fund has over larger industry trends, this is concerning to me. Brazil is my home. Our startup ecosystem has proven to be worth investing in, full of local talent, and I know this is also true for other emerging markets.
I understand why fellow investors may be feeling cautious. Risk-averse behavior is to be expected in times of economic change. However, now is the perfect time to invest in emerging economies.
Not only is competition for investors lower in these markets, but there is a deep talent pool. Beyond these benefits, certain enablers and advantages should inspire outside investors to reframe their thinking around emerging markets and recognize why they are a strong bet for your funding dollars in times like these.
Redefining Emerging Markets
Despite the image of emerging markets as high risk, there are some ways they are better off than more established economies. For starters, in emerging markets, leaders of all stripes—from startup founders to government officials—expect changes to happen and in many cases, have already prepared for those changes.
This has played out so far in 2022, where emerging market economies have had top-performing stock markets and suffered less rapid inflation than developed markets. Historically, emerging markets have also fared better through recession recovery efforts. In times of transition, it makes more sense to stick with the folks who know how to ride the waves gracefully.
Additionally, due to unique obstacles (i.e. changing currency valuations, inefficient infrastructure, etc), emerging markets are more advanced in verticals like fintech. The LatAm region in particular is ahead of the curve regarding neobanks. For example, Brazil’s Nubank boasts 34 million users. In June, it launched its crypto trading platform and reached 1 million users in just one month.
Crypto lends itself well to emerging markets, especially for processes like ex-pat citizens sending remittance payments back home. According to a 2021 report, half of the top 20 countries adopting crypto were emerging markets.
Before you default to North America or Europe when seeking your next investment, consider the vertical you’re after and if that industry is more advanced elsewhere.
Markets Ripe for Disruptive Technology
Certain enablers make emerging markets particularly ripe for disruptive technologies. The first is high mobile adoption and internet access. Latin America had 77% smartphone adoption in 2021, which is projected to reach 82% by 2025. Similarly, in sub-Saharan Africa, smartphone adoption is predicted to rise to 75% by 2025. With access to mobile internet, people have access to more information, resources, education, and so on.
Another enabling factor I witnessed in my time at Facebook and Pinterest is that people in emerging markets are more open to trying new things. Users in Latin American and South East Asian countries were more willing to test new technologies or features than those in North America or Europe.
We can see this today with cryptocurrencies. According to a recent study, people in emerging economies are more receptive to crypto, with 41% of people invested in it compared to 22% from developed markets.
Finally, emerging markets tend to have younger populations, who are more likely to report smartphone usage. This is not projected to change in the near future, either. A 2019 UN report highlighted that for many of the regions that include emerging markets, the fastest-growing population group was that of working-age people (and this trend is projected to continue).
Young, connected smartphone users with jobs (read: disposable income) and a willingness to try new things? It sounds like a good place to invest in a startup to me.
A Global Perspective with a Local Twist
When an investor puts their money in an emerging market for the first time, the best thing they can do is to think globally but act locally. Draw on what you already know. Many emerging markets could greatly benefit from the same platforms that exist in more advanced markets, with some localizations.
Take Uber as a typical example. In Brazil, before Uber launched, there were the ride-sharing apps 99 and EasyTaxi. These were replications of Uber’s platform, but with local considerations (customers could pay cash and traditional cabs were the main drivers). By the time Uber arrived, it faced a market with established competitors.
In the second quarter of this year, 70% of the $88 billion invested in startups went toward three verticals: SaaS, TMT, and fintech. In times of change, people like to play it safe. So why not try what you know in a new region? If your investment portfolio already includes a successful platform, can you find it being replicated elsewhere and share your key learnings? If there is a sector that is important to you, but you missed out on the early stages of a startup that is now a success, can you find a new similar opportunity in an emerging market?
In 2007 I started a social media website for beer lovers based on American websites that were not available in Portuguese. This was a passion project born of a spreadsheet to compare notes after a month abroad trying out different beers. It also became my playground where I could experiment with different integrations that would later serve me at Facebook, Microsoft, and Pinterest. I replicated a successful platform, shaped it to fit my local market, and then applied the lessons I learned elsewhere.
Similarly, investing in emerging markets can be an untapped opportunity for VCs to learn more about unfamiliar markets while sharing their knowledge to collaborate toward success. Who knows, maybe you’ll find the next big unicorn.
Main image: São Paulo (Adobe Stock)
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